What is Soft Paternalism, and
the Best it has to Offer in the Battle to Quit
Smoking

Edward Joonho Lee

Harvard Law School Class of 2006

Submitted in Fulfillment of the

Course and Third Year Written Work
Requirement

April 2006

Abstract . The behavioral law and
economics concept of “soft paternalism” offers a way to
satisfy both the American predilection to remain skeptical of
paternalistic government regulation and the temptation to take
advantage of well-established evidence that people often stray from
the traditional assumption of rational behavior and decision-making
in fairly predictable ways, by offering policymakers the
possibility of crafting regulations and laws aimed towards steering
people away from irrational, or boundedly rational, behavior so
long as individuals can easily opt-out if they so choose. Of all
the proposals introduced and outlined by various academics in the
field of behavioral law and economics, a government-sponsored
self-regulation regime using customizable cigarette ID cards offers
the best of what soft paternalism has to offer. The plan is
directed towards an activity that is universally accepted as a
“bad” and that imposes great costs upon both society
and the individual smokers. Smoking offers an example of when
behavior and decisions stray from the rational actor model, as
smokers display prominent symptoms of self-control and
time-inconsistency problems, leading them to make choices that
stray from their own personal assessment of what is in their
best interest. Moreover, an ID card regime takes advantage of soft
paternalism tools that have previously been shown to be highly
effective in mitigating boundedly rational behavior, including
consciously selected default rules and individually selected
pre-commitments. Finally, an ID card system includes the lynchpin
of soft-paternalism, libertarian-pleasing opt-outs, by allowing
time-consistent smokers who are not smoking due to self-control
problems to opt-out of any regulation, allowing them to maximize
their own rationally derived personal welfare with minimal
inconvenience.

Introduction

“Paternalism” is generally not a
popular word in the United States. We are the nation of the
“American Dream,” of taking responsibility for
one’s own life and running with it, of, "pulling oneself up
by the bootstraps." Americans are famous for distrusting their own
government, especially of the federal sort, and demanding to decide
things for themselves locally, at least when absolutely zero
government involvement is not an option. In short, Americans
don’t like the suits in Washington telling them what to do or
how to do it.

While our French and German friends may chuckle and
wonder why we have stubbornly refused to follow their lead and
conjure up our very own splendid dreams of a government supported
utopia, many, if not most, traditional economists and
economics-driven policy makers would seem likely to applaud our
American love for independence and pejorative use of the word
“paternalism”. Even when markets fail or people make
poor choices (i.e. engaging in drugs, smoking, excessive drinking,
etc.), these traditionalist shun away from anything labeled as
paternalistic, favoring instead minimalist measures, such as
correcting imperfect information by providing the public with a
public service announcement, or no measures at all (arguing that
people are the best sources of information regarding their own
well-being and preferences; therefore, the choices people make,
even unseemly ones, are the most welfare enhancing).

This paper seeks to challenge this absolutist
stance against paternalism both generally and specifically in the
case of government regulation of tobacco, largely by drawing
attention to and bringing together the work academics in the field
of behavioral law and economics. I will argue that a soft form of
paternalism is both desirable and often inevitable in any sort of
organized society, that the insights of behavioral law and
economics into the potential benefits of a soft paternalism
approach can benefit regulators and policymakers across a myriad of
fields, and that novel (softly paternalistic) proposals in the
troublesome realm of government regulation of cigarettes are worthy
of and ripe for serious consideration.

The remainder of this paper will proceed as
follows. Section 1 provides an introduction to the notion of soft
paternalism, continues with justifications for consideration by
policymakers of a soft paternalism approach to law and regulation,
and then addresses criticisms of this approach. Section 2 lays out
a brief history of government and FDA regulation of tobacco.
Section 3 introduces concepts of behavioral law and economics
particularly relevant to tobacco regulation: self-control and
“time-inconsistency” problems, and, finally, Section 4
will discuss and judge several novel soft paternalism approaches to
the problem of smoking (which implicates both self-control and
time-inconsistency problems), including sin taxes and cigarette ID
cards, that merit genuine consideration by future regulators.

Section 1:

Soft Paternalism

Rejection of Traditional Assumptions (Homo
Economicus)

The behavioral law and economics idea of soft
paternalism requires as its foundation a rejection of an assumption
that is wildly pervasive and influential in the fields of both
economics and the law: “that almost all people, almost all of
the time, make choices that are in their best interest or at the
very least are better, by their own lights, than the choices that
would be made by third parties.”[1] Another way of phrasing this assumption, in
regards to law and economics, is, “’All human behavior
can be viewed as involving participants who [1] maximize their
utility [2] from a stable set of preferences and [3] accumulate an
optimal amount of information and other inputs in a variety of
markets.’ The task of law and economics is to determine the
implications of such rational maximizing behavior in and out of
markets, and its legal implications for markets and other
institutions.”[2]

Proponents of behavioral law and economics,
however, take exception to the whole-hearted acceptance of this
assumption. According to Christine Jolls, et al, behavioral law and
economics, the theoretical mother of soft paternalism, is the
exploration of, “...the implications of actual (not
hypothesized) human behavior for the law. How do ‘real
people’ differ from homo economicus?”[3]

The dominant answer to the question posed by Jolls,
et al, is that humans are not perfect economic actors. Rather,
people are limited by “bounded rationality.”
“Bounded rationality...refers to the obvious fact that human
cognitive abilities are not infinite. We have limited computational
skills and seriously flawed memories. People can respond sensibly
to these failings; thus it might be said that people sometimes
respond rationality to their own cognitive limitations, minimizing
the sum of decision costs and error costs. To deal with limited
memories we make lists. To deal with limited brain power and time
we use mental shortcuts and rules of thumb. But even with these
remedies, and in some cases because of these remedies, human
behavior differs in systematic ways from that predicted by the
standard economic model of unbounded rationality. Even when the use
of mental shortcuts is rational, it can produce predictable
mistakes. The departures from the standard model can be divided
into two categories: judgment and decisionmaking. Actual judgments
show systematic departures from models of unbiased forecasts, and
actual decisions often violate the axioms of expected utility
theory.” [4]

Judgments

In the category of judgments, the work of Tversky
and Kahneman[5] is seminal. According to Tversky and Kahneman,
“Many decisions are based on beliefs concerning the
likelihood of uncertain events such as the outcome of an election,
the guilt of a defendant, or the future value of the dollar. These
beliefs are usually expressed in statements such as ‘I think
that...,’ ‘chances are...,’ ‘it is unlikely
that...’ and so forth...[P]eople rely on a limited number of
heuristic principles[6] which reduce the complex tasks of assessing
probabilities and predicting values to simpler judgmental
operations. In general, these heuristics are quite useful, but
sometimes they lead to severe and systematic
errors.”[7] The authors go on to introduce the three heuristics
they conclude are most systemic in people’s perceptions:
“representativeness,” “availability” and
“anchoring.”

Representativeness

The representativeness heuristic can account for
situations in which, “...probabilities are evaluated by the
degree to which...A resembles B. For example, when A is highly
representative of B, the probability that A originates from B is
judged to be high...if A is not similar to B, the probability that
A originates from B is judged to be low.”[8] Serious errors in making judgments using the
representativeness heuristic can occur, for instance, because
actors often mistakenly exhibit an, “...insensitivity to
prior probability of outcomes.”[9] In one cited example, subjects were told that the
group from which “descriptions had been drawn consisted of 70
engineers and 30 lawyers...Apparently, subjects evaluated the
likelihood that a particular description belonged to an engineer
rather than to a lawyer by the degree to which this description was
representative of the two stereotypes, with little or no regard for
the prior probabilities of the categories.”

Availability

The availability heuristic is at play in situations
where “people assess the frequency of a class or probability
of an event by the ease with which instances or occurrences can be
brought to mind...However, availability is affected by factors
other than frequency and probability. Consequently, the reliance on
availability leads to predictable biases...” such as,
“...the retrievability of instances.”[10]

In addition to the obvious example of familiarity
(where, for instance, “...one may assess the risk of heart
attack...by recalling such occurrences among one’s
acquaintances...”), “there are other factors, such as
salience, which affect...retrievability. For example, the impact of
seeing a house burning on the subjective probability of such
accidents is probably greater than the impact of reading about a
fire in the local paper.”[11] In one study that exemplifies the salience aspect
of the availability heuristic, participants were read a list of
celebrities, both male and female. The participants were than asked
to determine whether the list read to them consisted of more males
or more females. Of course, different groups were read lists
comprised of different names, and some of the lists contained more
famous men and others a greater number of famous women. Not
surprisingly, for each list, the participants incorrectly
determined that the gender with more famous names appeared on the
list more than the opposite gender[12] .

Anchoring

Finally, the anchoring heuristic is summed up as a
phenomenon where, “...people make estimates by starting from
an initial value that is adjusted to yield the final answer. The
initial value, or starting point, may be suggested by the
formulation of the problem, or it may be the result of a partial
computation...different starting points yield different estimates,
which are biased toward the initial value.” For example, in
one study, participants were asked to estimate a variety of
quantities, including the percentage of African countries in the
United Nations. Before the participants were allowed to estimate, a
“wheel of fortune,” consisting of numbers ranging from
0 to 100, was spun and a number thereby determined in the presence
of the participants. The participants had already been split into
different groups, with each group receiving a different
“wheel of fortune” number. Participants were than asked
to select whether the percentage of African nations in the U.N. was
higher or lower than the determined number, and then to estimate
the actual percentage. The “wheel of fortune” numbers
were shown to have a clear effect on estimates. As shown in Figure
1 below, “...the median estimates of the percentage of
African countries in the United Nations were 25 and 45 for groups
that received 10 and 65, respectively, as starting
points.”[13]

Fig 1. Estimated Percentage of African Nations in
UN by Initial Value

Optimism Bias

Another oft-cited example of the effect of biases
upon the ability of people to make proper judgments in the
classical economics sense is referred to as the “optimism
bias,” or “risk denial.” In short, people often
come up with different estimates when they rate a given risk to
themselves, their families, their country, the world, or people in
general.[14]

Separate studies by Lennart Sjoberg and Hermand, et
al, suggest that “drastic differences” exist in the way
people perceive risks to themselves (or their families)
and...people in general.[15] Moreover, people will often rank the order between
risks differently for different “targets.”[16]

Figure 1 below, created from findings of the
Hermand, et al, study, suggest that, “people most often claim
to be less subjected to risk than others...”[17] Of course, these findings support the existence of
an optimism bias, as everyone cannot be correct in their belief
that they are less exposed to risk than the general public, even if
some are.

Fig. 2.[18] Average Risk ratings for a Sampling of Items for
which Target Effect was Strongest

The notion of a personal optimism bias is further
buttressed by the findings that when people are simply asked to
rate a risk, without specification of a target, this
“no-target” condition produces risks ratings roughly
equal to those found when rating “general
risk,”[19] and that, “...rating the risk to ‘any
one person’ gave the same result, refuting the
sometimes-heard explanation of the general-personal difference that
it reflects the fact that general risk ratings refers to many more
persons than personal risk ratings.”[20]

What is most important to glean, for purposes of
the remainder of this paper, from the notion of these and other
boundedly rational mistakes in judgments is that the behavior
stemming from these heuristics (“shortcuts”) and biases
is often highly predictable.

Decisionmaking

In regards to the rationality of choices
(decisionmaking), Sunstein and Thaler take a fairly aggressive
stance, with which the author of this paper agrees. According to
Sunstein and Thaler[21] :

The presumption that individual choices should be
respected is usually based on the claim that people do an excellent
job of making choices, or at least that they do a far better job
than third parties could possibly do. As far as we can tell, there
is little empirical support for this claim, at least if it is
offered in this general form. Consider the issue of obesity. Rates
of obesity in the United States are now approaching 20 percent, and
over 60 percent of Americans are considered either obese or
overweight. There is overwhelming evidence that obesity causes
serious health risks, frequently leading to premature death. It is
quite fantastic to suggest that everyone is choosing the
optimal diet, or a diet that is preferable to what might be
produced with third-party guidance. Of course, rational people care
about the taste of food, not simply about health, and we do not
claim that everyone who is overweight is necessarily failing to act
rationally. It is the strong claim that all or almost all Americans
are choosing their diet optimally that we reject as untenable. What
is true for diets is true as well for much other risk-related
behavior, including smoking and drinking, which produce over
500,000 premature deaths each year. In these circumstances,
people's choices cannot reasonably be thought, in all domains, to
be the best means of promoting their well-being. Indeed, many
smokers, drinkers, and overeaters are willing to pay for third
parties to help them choose better consumption sets. On a more
scientific level, research by psychologists and economists over the
past three decades has raised questions about the rationality of
many judgments and decisions that individuals make. People fail to
make forecasts that are consistent with Bayes's rule[22] , use heuristics that can lead them to make
systematic blunders, exhibit preference reversals (that is, they
prefer A to B and B to A), suffer from problems of self-control,
and make different choices depending on the framing of the problem.
It is possible to raise questions about some of these findings and
to think that people may do a better job of choosing in the real
world than they do in the laboratory. But studies of actual choices
reveal many of the same problems, even when the stakes are
high.

Sunstein and Thaler go on to support this position
by citing a revealing behavioral economics study involving defined
contribution savings plan portfolios[23] . Employees were shown the probability
distributions of expected retirement income from their own and two
other (reflecting the average and median choices of their fellow
employees) investment portfolios (the participants were not told
which portfolio was their own).

In line with the rejection of the “homo
economicus” assumption, only twenty percent of the
participants viewed their own portfolios as advantageous over both
the others. On average, the participants preferred the median
portfolio to their own by a significant margin and rated the
average portfolio equally with their own.[24] As Sunstein and Thaler put it: “Apparently,
people do not gain much, by their own lights, from choosing
investment portfolios from themselves.”[25]

Moreover, Tversky and Kahneman’s
“prospect theory” is increasingly gaining traction as
an alternative to traditional economics’ expected utility
theory. Prospect theory posits that people will value an outcome
according to the difference it presents from an initial starting
point, rather than the actual value of the outcome it self. For
instance, “...discovering that one will receive a bonus of
$2500 is often experienced differently if the previous year’s
bonus was $0 than if the previous year’s bonus was $5000,
wholly apart from any tangible financial obligations the individual
faces.”[26]

Paternalism, Everywhere

Default Rules

One of the keys to understanding the normative
value of policies employing soft paternalism is that, given the
failure of the “perfectly rational economic actor”
paradigm, paternalism is already an unavoidable force in nearly all
facets of civilized existence: “In many situations, some
organization or agent must make a choice that will affect the
behavior of some other people. There is, in those situations, no
alternative to a kind of paternalism—at least in the form of
an intervention that affects what people choose. We are
emphasizing, then, the possibility that people’s preferences,
in certain domains and across a certain range, are influenced by
the choices made by planners...’A minimum of state
intervention is always necessary...When a loss is left where it
falls in an auto accident, it is not because God so ordained it.
Rather it is because the state has granted the injurer an
entitlement to be free of liability and will intervene to prevent
the victim’s friends, if they are stronger, from taking
compensation from the injurer.’”[27] The point here is that governments and other
authorities (i.e., employers), through the creation of default
rules such as the entitlement to the injurer just described,
already inevitability affect and drive choices, preferences and
behavior, even when parties can opt-out (i.e., by contracting
around a default rule).

A default rule effect upon choices and behavior has
been shown to be quite prominent and powerful in a plethora of
settings. For instance:

In the context of insurance, an unplanned, natural
experiment showed that the default rule can be very "sticky." New
Jersey created a system in which the default insurance program for
motorists included a relatively low premium and no right to sue;
purchasers were allowed to deviate from the default program and to
purchase the right to sue by choosing a program with that right and
also a higher premium. By contrast, Pennsylvania offered a default
program containing a full right to sue and a relatively high
premium; purchasers could elect to switch to a new plan by
"selling" the more ample right to sue and paying a lower premium.
In both cases, the default rule tended to stick. A strong majority
accepted the default rule in both states, with only about 20
percent of New Jersey drivers acquiring the full right to sue, and
75 percent of Pennsylvanians retaining that right. There is no
reason to think that the citizens of Pennsylvania have
systematically different preferences from the citizens of New
Jersey. The default plan is what produced the ultimate effects.
Indeed, controlled experiments find the same results, showing that
the value of the right to sue is much higher when it is presented
as part of the default package.[28]

A deeper examination of a recent study by James J.
Choi, et al[29] , involving the pervasive effect of default rules
upon the behavior and decisions of employees in large organizations
in regards to defined contribution pension plans (401(k) savings
plans) is worthwhile to underscore the impact of default rules

The heart of the Choi, et al study (and of central
importance to understanding the concept of unavoidable paternalism)
involves an examination of the effect of changing the
organizational default rules in regards to defined contribution
pension plans and reveals what the authors dub, “the path of
least resistance,” effect, whereby employees overwhelming
select the default plan, regardless of their stated
preferences[30] . To begin, the most common 401(k) plans begin
with a default rule of non-participation and require the employee
to take the affirmative step of enrolling in a plan[31] . These plans usually lead to savings behavior
that is below ideal levels. Here, Choi, et al, examined the results
of a previous survey[32] that followed the experience of three companies
who switched the default rule for employees from non-participation
to automatic enrollment. Two of the companies switched to automatic
enrollment for new employees only, while the third later also
switched the default for non-enrolled holdover employees as
well.

The results of the study are quite telling. For all
three companies, Choi, et al, first examined the rates of
participation in company 401(k) plans for employees who began their
jobs before the default rule switch to 401(k) automatic enrollment.
The ranges of these figures are represented in Figure 3, below.

Fig. 3. Ranges of Rates of Participation in 401(k)
Plans with Non-Participation Default[33]

While true that the rate of 401(k) participation
increased under the non-participation default rule over time, Choi,
et al, found that there was still a significant jump in
participation rates after a default rule switch to automatic
enrollment. The increase in the range of 401(k) participation rates
after 6 months of employment under the new automatic enrollment
default rule relative to the non-participation default are shown in
Figure 4 below.

As the increases in 401(k) participation rates over
time under the old default rule should indicate, it is true that
the marginal effect of the new automatic enrollment default rule
decreases with time. However, according to Choi, et al, the rate of
employee participation in company 401(k) plans is still a
substantial 31 to 34 percent higher after three years under the new
default of automatic enrollment[35] .

One initial survey finding of particular import to
the implications of default rules, soft paternalism and the Choi,
et al, study in the realm of tobacco regulation involves the future
plans of the study participants. While describing the survey
findings here, the important implications of this particular facet
of the survey will be discussed in more detail later in this
paper.

In short, the Choi, et al, study began with a
survey of employee savings. The survey revealed that over
two-thirds of the participants were saving at a rate lower than
what participants labeled as an ideal savings rate[36] . Most of the remaining one-third labeled their
savings rate as “about right,” while an,
unsurprisingly, low number (one-half of one percent) rated their
savings as above their ideal rate[37] .

Moreover, none of the Choi, et al, survey
respondents stated a future intention of saving at a rate below
their current rate, while 35 percent of those in the low savers
group of respondents and 11 percent of those in the “about
right” group reported plans to increase contribution rates in
the closely following months[38] . A follow-up survey, however, revealed that an
overwhelming percentage (86 percent) of those planning a near term
increase to savings rates did not follow through with their stated
intentions during the four months following the initial
survey[39] .

Fig. 6.

As previously stated, these findings have
potentially significant implications for the potential of soft
paternalism as a method of regulating tobacco use and will be
discussed in more detail below.

What is the fallout of the Choi, et al, study? The
authors summarize their conclusions as drawing attention to,
“the importance of passive decision-making. For better or
worse, many households appear to passively accept the status
quo.” More important is the presence of a, “common
theme: employees often take the path of least resistance. As a
result employers cannot escape this responsibility. Whatever
savings plan an employer creates necessarily advantages certain
passive or nearly passive choices over other active choices.
Sophisticated employers should choose their plan defaults
carefully, since these defaults will strongly influence the
retirement preparation of their employees.”[40]

Choi, et al, also generalize the implications of
their work, by stressing the role of defaults in policy making
generally: “Policy-makers should also recognize the role of
defaults, since policy-makers can facilitate, with laws and
regulations, the socially optimal use of defaults. For example,
default contributions to company stock may lead to insufficient
diversification. Policymakers could legally cap default investments
to such problematic asset categories...It is easy to identify
dozens of ways that thoughtful regulations can influence passive
decision-makers without encroaching on the freedom of active
decision-makers to opt out of the defaults and choose in their own
(perceived) best interest.”[41]

Indeed, if one were to ascribe to the view,
expressed above, that a no-liability regime (in the context of auto
accidents) is inevitably and unavoidably already a legal (default
rule) regime (the granting of a legal entitlement to an injurer) in
and of itself -- one that inevitably and unavoidably affects
choices, preferences and behavior -- it seems virtually impossible
to conjure up a scenario in any organized civilization where
paternalism (or some sort and on some level, at least) is not
already in play.

Anchoring (Again)

While default rules often seem to maintain a
certain level of primacy in the discussion of unavoidable (or
“inevitable”) paternalism, they are not alone in
substantiating the unavoidable paternalism view. As noted above,
the anchoring heuristic is as a phenomenon whereby,
“...people make estimates by starting from an initial value
that is adjusted to yield the final answer. The initial value, or
starting, may be suggested by the formulation of the problem, or it
may be the result of a partial computation...different starting
points yield different estimates, which are biased toward the
initial values.”

Anchoring has been shown to have a perverse effect
upon the ability of policymakers to create accurate and effective
regulations by skewing the results of contingent valuation studies
(increasingly employed in the process of crafting regulation, i.e.
increased safety), which attempt to elicit (not to affect)
people’s values, such as “willingness to pay.”
The problem lies in the anchoring heuristic. Participants (ordinary
people) in contingent valuation studies usually lack well-formed
preferences and values (at least in the quantitative sense) for the
measures they are being asked to state. Participants’
statements of values are thereby too easily influenced by how the
surveys are presented.

According to Sunstein and Thaler,
“Paternalism, in the sense of effects on preferences and
choices, is not supposed to be a part of the picture. But it is
extremely difficult for contingent valuation studies to avoid
constructing the very values that they are supposed to
discover...some form of paternalism verges on the inevitable:
Stated values will often be affected...by how the questions are set
up.”[42]

An example of the anchoring heuristic effect in
this context involves the willingness to pay for a reduction in
motor vehicle related deaths[43] . Each participant was faced with both a pound
(money) amount and a figure representing reduction of risk. Half of
the participants were shown an initial money amount of 25 pounds,
while the remainder was shown an initial money amount of 75 pounds.
They were then asked if they would or would not pay the given
amount for the given reduction of risk figure. If they agreed to
pay, the money amount would rise until they stated an unwillingness
to pay (there was also a “not sure” option; if they
were “not sure” money amounts were adjusted until a
stable response could be elicited).

The results revealed a sizeable anchoring effect.
For each given figure representing risk, the minimum
willingness to pay was higher for the 75 pound group than the
maximum willingness to pay for the 25 pound group[44] (see Figure 7, below).

Fig. 7 Willingness to Pay by Initial Dollar Value
For Reduction in Risk

Accordingly, it seems a sensible conclusion to
state that, “...people are sometimes uncertain about
appropriate values, and whenever they are, anchors have an
effect—sometimes a startlingly large one...What is clear is
that in the domains in which contingent valuation studies are used,
people often lack well-formed preferences, and starting points have
important consequences for behavior and choice.”[45]

Framing

A concept related to the anchoring heuristic, the
so-called “framing” effect, will often operate
paternalistically in a manner similar to anchoring. Framing has
been commonly cited to show that the decisions, preferences and
behavior of people who, “... lack clear, stable, or
well-ordered preferences,” can be drastically manipulated by
the wording of identical alternatives[46] .

In one experiment, participants’ willingness
to undergo a given medical procedure varied drastically depending
up an alteration of the wording of the question, notwithstanding
the fact that the two versions communicated identical information.
Two groups of participants were provided with the following
information:

1) “’Of those who undergo this
procedure, 90 percent are still alive after five
years.’”

2) “‘Of those who undergo this
procedure, 10 percent are dead after five years.’”

Tellingly, participants who were told version one
were far more likely to agree to the medical procedure than those
who were told version two.[47]

Moreover, “People weigh losses more heavily
than gains...They will typically bet on a coin toss only if their
potential winnings are twice as big as the amount they stand to
lose. Likewise, mothers will go to greater lengths to avoid the
harm a lack of breastmilk might inflict than to secure the benefits
breastfeeding can bring.”[48]

It seems clear then, that in certain cases of
ill-formed preferences, stated preferences, behavior and choices
can often be little more than, “an artifact of how the
question is put.”[49] As in the medical procedure experiment, this
seemingly simple effect can have life-altering consequences. In
short, “How information is framed matters.”[50]

How Default Rules, Framing and Anchoring
Work

Academics in the field of behavioral law and
economics have offered numerous explanations for how default rules,
framing effects and the anchoring heuristics operate to influence
behavior, choices and preferences.

One plausible explanation is that people,
“might think that the default plan or value captures one or
the other.”[51] In other words, it is conceivable that an
individual might initially hold a slight preference for one option
over another, but a default rule may lead the individual to believe
that planners decided upon the default as the result of an accurate
deliberative process over the individual’s wellbeing.

Another possibility involves inertia. Overriding a
default rule or initial value requires at least some minimal level
of action, such as holding onto, filling out and returning a form.
This can, “leave room for failures due to memory lapses,
sloth, and procrastination.”[52]

Academics have also put forth so-called
“endowment effects” as an explanation for the
persistence of defaults, framing and anchoring. The term
“endowment effect” represents the phenomenon whereby
people usually assign higher values to goods that they already have
or received, relative to those goods that are assigned to
others[53] . Choices made are then affected by these values,
which have been skewed according to what individuals perceive has
been allocated to them.

Finally, many academics, including Sunstein and
Thaler emphasis the role played by “ill-formed
preferences” in these effects. Often, options can be hard to
understand, leading people to be confused as to their best option,
making it more tempting to fall back on a default. Or even when
options are well understood, choices may still be difficult to
value. Imagine, for instance, choosing between a stable investment
with a given return and a riskier investment with a sizably higher
return. Moreover, the more unfamiliar the context of a decision is,
the less likely that preferences will be easily formed[54] .

Finally, What is Soft Paternalism and Why?

We are faced then, with the following situation: 1)
We are well aware that there are bounds to the rationality of human
beings, and as a result mistakes are often made in the judging and
decision-making processes; moreover, these errors in judgment and
decision making are often highly predictable; and 2) Authorities,
such as policymakers, employers and regulators, already inevitably
effect and skew behavior, choices and preferences through, for
instance, default rules (even in cases of no rule), anchoring and
framing – thus, paternalism, on some level, is
unavoidable.

The most productive and responsible use of this
growing behavioral law and economics knowledge, therefore, is to
harness and use it to create laws, default rules, and information
campaigns, “with the explicit goal of improving welfare of
the people affected by them.”[55]

Proponents of behavioral law and economics
acknowledge that to traditional libertarians and economist, this
point may seem objectionable. Paternalism, as the term is used in
the behavioral law and economics movement and this paper, mean
policymakers, both private and public, “not trying to track
people's anticipated choices,” but rather,
“self-consciously attempting to move people in
welfare-promoting directions.”[56] Therefore, it is true that such a shift in the
fundamental motives behind policymaking would constitute
paternalism.

However, Sunstein and Thaler seek to soothe the
concerns of these hard-core libertarians by arguing convincingly
that soft paternalism (or “libertarian paternalism” as
they call it) can successfully combine self-conscious attempts to
harness knowledge about people’s actual behavior to create
welfare promoting policies with libertarianism: “The
libertarian aspect of our strategies lies in the straightforward
insistence that, in general, people should be free to opt out of
specified arrangements if they choose to do so. To borrow a phrase,
libertarian paternalists urge that people should be ‘free to
choose.’ Hence we do not aim to defend any approach that
blocks individual choices.”[57]

Thus, soft paternalism seeks to take advantage of
knowledge gained from the field of behavioral economics and other
social sciences (such as psychology) to alter individuals’
decisions that would be different if they, “...had complete
information, unlimited cognitive abilities and no lack of
selfcontrol,”[58] while remaining cautious to libertarian sentiments
by only imposing, “trivial costs on those who seek to depart
from the planner’s preferred option.”[59]

The Choi, et al, study serves as a case in point.
If it is well-established that the welfare of individuals and
society generally are improved by an increased rate of employee
enrollment in defined contribution company pension plans, it seems
difficult to justify an opposition to switching the default rule
from non-participation to automatic enrollment (which as discussed
above, has dramatic positive effects upon enrollment) so long as
employees are given a relatively easy path towards opting out.

Indeed, as discussed throughout this paper thus
far, a default rule of non-participation already unavoidably
affects and skews behavior. Therefore, it is far from clear that an
automatic enrollment default is any more paternalistic in the sense
of affecting behavior, choices and preferences. Moreover, those
libertarians who fear government coercion when soft paternalism is
employed in the public sector should be similarly assuaged by the
presence of easy opt-outs in any true soft paternalism scheme.

In the context of the public sector, Christine
Jolls and Cass Sunstein provide an useful perspective from which to
judge the merits of a behavioral law and economics approach to
creating law. The heart of their position lies in the distinction
between “debiasing law” and “debiasing through
law.”[60]

Both debiasing law and debiasing through the law
share the goal of dealing effectively with human departures from
the traditional economics assumption of a perfectly rational
“homo economicus.” Both approaches also share the
position of this paper that, “given a demonstration of the
existence and importance of a particular aspect of bounded
rationality, the law should be structured to presume the existence
of that particular shortcoming in human behavior.”[61]

Debiasing law is then a method of
“insulation” from irrational behavior, an attempt
“to protect legal outcomes from falling victim to bounded
rationality.”[62] According to Jolls and Sunstein, most attempts to
deal with bounded rationality through law fits within this
“insulation” characterization. For example, the growing
acceptance of the position that boundedly rational individuals
believe, “that potentially risky products are substantially
safer than they in fact are,” has led to the adoption of,
“heightened standards of manufacturer liability for consumer
products.”[63] Moreover, corporate law’s business judgment
rule can be thought of as insulation from, “’Monday
morning quarterbacking,’ from judges and juries,” whose
decisions would hold corporations, directors and officers liable,
“for bad events even if preventing those events would have
been extremely difficult,”[64] or even when the decision was the correct one when
it was made (likely in a situation involving considerable
uncertainty).

On the other hand, debiasing through law is born
from the belief that, “legal policy may respond best to
problems of bounded rationality not by insulating legal outcomes
from its effects, but instead by operating directly on the
boundedly rational behavior and attempting to help people either to
reduce or to eliminate it.”[65] Such debiasing through law, “will often
be a less intrusive, more direct, and more democratic response to
the problem of bounded rationality.”[66] Moreover, debiasing through law represents the
approach taken by soft paternalism – that of,
“self-consciously attempting to move people in
welfare-promoting directions.”[67]

A useful example of the Jolls and Sunstein approach
of debiasing through law involves debiasing in response to the
optimism bias (discussed above) effect manifested in the context of
consumer safety. As mentioned earlier, it is well established that
“optimism bias is likely to produce an overall
underestimation by consumers of the risk associated by consumers of
the risk associated with a product.”[68] It is worth nothing that Jolls and Sunstein
acknowledge that evidence of optimism bias in the realm of consumer
safety may also justify consideration of a debiasing law approach
of legal insulation through, for instance, heightened standards of
product liability or a complete ban of the product.[69] However, as the authors point out, a heightened
standard of product liability or product ban would, “impose
large costs,”[70] such as reducing use of an useful product to below
optimal levels for those who accurately assess the risks associated
with the product in the case of heightened standards, and a
complete loss of welfare associated with the product’s use in
the case of an outright ban.

Jolls and Sunstein begin by describing evidence
that optimism bias can be successfully controlled by,
“harnessing separate aspects of boundedly rational
behavior.”[71] One of the potential aspects of boundedly rational
behavior at the disposal of policymakers to aid overly optimistic
consumers is the availability heuristic (described above). The
availability heuristic has potential to temper optimism bias
because, “making an occurrence ‘available’
increases individuals’ estimates of the likelihood of the
occurrence.”[72] The other potential strategy cited by Jolls and
Sunstein involves debiasing through framing, combined with an
understanding of loss aversion: “...the social science
evidence shows that many people weigh losses more heavily than
gains in evaluating potential outcomes. This evidence suggests that
framing the presentation of information to exploit the extra weight
attached to losses may counteract bounded rationality in the form
of optimism bias.”[73] For instance, conveying the losses associated with
neglecting breast self-examination (missing a then-treatable tumor)
has been shown to be far more effective in changing behavior than
emphasizing positive aspects of self-examination (increased chance
of finding a tumor).[74]

In terms of translating these debiasing techniques
into law, Jolls and Sunstein offer potential legal strategies for
both debiasing through availability and debiasing through
framing.

First, the authors note that, “debiasing
through the availability heuristic would focus on putting at
consumers’ cognitive disposal the prospect of negative
outcomes from use, or at least unsafe use, of a particular
product,” and suggest a legal regime whereby firms would have
a legal obligation to, “provide a truthful account of
consequences that resulted from a particular harm-producing use of
the product, rather than simply providing a generalized warning
that fails to harness availability...the law could further require
that the real-life story of accident or injury be printed in large
type and displayed prominently, so that consumers would be likely
to see and read it before using the product.”[75]

In regards to debiasing through framing, the
authors note that, “Simple requirements that firms
‘provide’ information’ may be ineffective in this
context in part because firms’ interest will be in framing
the information in a way that minimizes the risks perceived by
consumers.”[76] Thus, the authors propose, “a legal
requirement that firms identify the negative consequences
associated with their product or a particular use of their product,
rather than the positive consequences associated with an
alternative product or with an alternative use of the
product.”[77]

It is worth repeating that these examples of
potential implementations of debiasing through law, versus
debiasing law, represents the approach taken by soft paternalism
– that of “self-consciously attempting to move people
in welfare-promoting directions.”[78] Moreover, unlike debiasing law approaches such as
heightened liability or a complete ban (leading to increased costs
and/or product removal), neither debiasing through availability
with a requirement upon firms to prominently display real life
accounts nor debiasing through framing by requiring the display of
negative consequences of a product’s use violate the
libertarian principle of ensuring choice by leaving fully intact
the consumers’ choice to use the product. Indeed, so long as
consumers are properly steered clear of boundedly rational
behavior, those rationally valuing the benefits of a
product’s use more heavily than the risk-related and other
costs of use would continue to enhance their welfare (something
planners should avoid eliminating) by using the product.

Criticisms of Soft Paternalism

The embracement of behavioral law and economics and
the soft paternalism approach, of course, is not free of critics,
many of whom present legitimate and serious concerns.

To begin, in “Paternalism and
Psychology,” Harvard economist Edward L. Glaeser argues that
soft paternalists fail to recognize and properly emphasize many of
the dangers inherit in paternalism, both hard and soft, including
when used to address boundedly rational behavior:[79] “[F]laws in human cognition should make us
more, not less, wary about trusting government decisionmaking. The
debate over paternalism must weight private and public errors. If
errors are thought to be exogenous then there is little reason to
believe that these errors will be greater among public or private
decisionmakers, but if psychological errors are understood to be
endogenous, then there are good reasons why we might think that
public decisionmaking is likely to be more flawed than private
decision making.”[80]

Glaeser continues by supplying evidence that
psychological errors are indeed endogenous, and then asserts that
this organic origin of boundedly rational behavior weighs against
public decision-making. First, Glaeser points out that private
actors, “face stronger incentives to get things right than
government decisionmakers do when making decisions about private
individuals.”[81]

Next, Glaeser presents a model that assumes (as is
indeed likely often the case) that “the supply of
error,” or boundedly rational behavior, stems from a private
firm whose interest lies in generating larger profits by
manipulating various errors in individuals’ decision making
process, such as the framing effect, to increase demand. This model
then suggests that, “If the cost of persuading one government
bureaucrat is less than the cost of persuading millions of
consumers, then government bureaucrats will be more prone to error
than private consumers.”[82]

Moreover, according to Glaeser, individuals will
naturally have greater incentives to make error-free judgments and
decisions in the context of personal consumption choices than when
electing public officials. Moreover, “the lack of incentives
in politics and among politicians and the small number of
decisionmakers suggest that government decisionmaking is likely to
be particularly erroneous.”[83] Therefore, allowing a small number of elected
officials to make paternalistic decisions, thereby taking personal
decisions out of the hands of better incentivized individuals, will
only exacerbate a failed decision making process and lead to a
potential “tyranny of the majority.”[84]

There are undoubtedly other concerns as well. For
instance, some would argue that in addition to the concerns
outlined by Glaeser, such as paternalistic policymakers being
similarly susceptible to bounded rationality and more likely to
hold weaker incentives to make error-free judgments and decisions
than an individual facing a personal decision, any move in the
direction towards paternalism should be rejected due to the
“public choice” problem. The public choice problem
entails lawmakers and regulators who are less concerned with
individual or societal well-being than their own parochial or
individual interests. Therefore, according to these critics,
placing more decisions into the hands of conflicted public
officials would be a mistake.

Moreover, others argue that decisions should also
be taken out of the hands of public officials because of legitimate
concerns regarding the potential for regulatory capture. Capture
theory, “states that either regulation is supplied in
response to... industry’s demand for regulation (in other
words, legislators are captured by the industry) or the regulatory
agency comes to be controlled by the industry over time (in other
words, regulators are captured by the industry)[85] . Increased policymaker discretion to implement
more paternalistic policies, accordingly, would simply lead to more
manipulative regulation and legislation geared towards the
interests of profit-maximizing firms rather than the well-being of
individuals and society.

Another oft-heard criticism of soft paternalism is
that it is inherently coercive, and therefore wrong as a matter of
principle regardless of behavioral law and economics-based
justifications.

Yet another criticism of soft paternalism heard
from libertarian circles is that in many cases, such as the 401(k)
defined contribution pension plans example, a choice need not
necessarily be made between one default over another. The suggested
alternative involves requiring active choice, whereby,
“Employers could avoid choosing a default if they required
employees to make an active choice, either in or
out.”[86] Also, rather than embracing paternalism, if
employers must assign some default rules they should, “avoid
paternalism by doing what most employees would want employers to
do. On this approach, a default rule can successfully avoid
paternalism if it tracks employees’
preferences.”[87] Moreover, some strong supporters of libertarians
and many economists would argue that the proper response to
individual errors in judgment and decisionmaking involves increased
provision of information, so that individuals can make their own
personal welfare maximizing decisions on a informed basis, rather
than any paternalistic tactics to nudge individuals into
policymakers’ preferred directions.

Finally, on the other end of the spectrum lie those
with the utmost faith in policymakers, ardent paternalists. These
“anti-libertarians” are, “suspicious of freedom
of choice and would prefer to embrace welfare
instead.”[88] Therefore, those in this camp would likely ask
soft paternalists why, if we know that one behavior produces more
net welfare than another, opt outs are included at all.

Response to Criticisms

Sunstein and Thaler, as well as others, provide
useful and largely convincing responses to the skeptics of the
behavioral law and economics approach, and many of their defenses
of soft paternalism incorporate concepts that have been discussed
at length in this paper.

To begin, in response with those who distrust the
government to make error-free or properly motivated decisions, most
proponents of soft paternalism concede the point that policymakers,
being human, are similarly susceptible to bounded
rationality.[89] Policymakers are usually, however, in positions of
great informational superiority relative to individuals. This
informational advantage will help to temper policymakers’ own
bounded rationality and usually covers a wide range of issues,
including which policies are welfare maximizing on a societal
level, an awareness of the pitfalls of bounded rationality (so as
to make them easier to avoid) and where and how consumers are
making boundedly rational errors in judgment and
decisionmaking.

Moreover, as discussed early, on many levels
paternalism is simply unavoidable. According to Sunstein and
Thaler, “In many situations, some organization or agent must
make a choice that will affect the behavior of some other people.
There is, in those situations, no alternative to a kind of
paternalism –at least in the form of an intervention that
affects what people choose...[G]overnments...have to provide
starting points of one or another kid; this is not avoidable...they
do so everyday through the rules of contract and tort, in a way
that inevitably affects some preferences and choices. In this
respect, the anti-paternalist position is unhelpful—a literal
nonstarter.”[90] It therefore seems clear that as paternalism in
government is inevitable, the best available option is to confront
our policymakers and elected officials with an explicitly asserted
expectation that the unavoidable paternalistic powers of government
are to be used to move individual choices and behavior in
productive and positive, rather than parochial or politically
beneficial, directions.

Capture theory, as a criticism leveled towards soft
paternalism, is on far from solid theoretical or empirical ground.
According to Viscusi, et al, capture theory (CT), “has no
theoretical underpinnings because it does not explain how
regulation comes to be controlled by the industry. In light of
there being several interest groups affected by regulation,
including consumer and labor groups as well as firms, why should
regulation be controlled by industry rather than by these other
interest groups?”[91]

Moreover, a growing body of empirical evidence,
inconsistent with the expectations of capture theory, has been
surfacing. For instance, “...cross subsidization is
when a multiproduct firm prices some goods below average cost and
makes up for the losses through revenue collected from the sale of
other goods priced above average cost. Such pricing behavior is
inconsistent with profit maximization and thus cannot be considered
pro-producer. Cross-subsidization has been regularly observed in
such regulated industries as railroads, airlines, and intercity
telecommunications. The other property is that regulation is often
biased towards small producers. Small producers are allowed to earn
greater profits relative to larger firms under regulation than they
would have earned in an unregulated market...Perhaps the strongest
evidence against CT is the long list of regulations that were not
supported by industry and have resulted in lower profits. The list
includes oil and natural gas price regulation and social regulation
over the environment, product safety, and worker
safety.”[92]

As mentioned above, some critics of soft
paternalism claim that any form of paternalism is inherently
coercive and therefore objectionable. It seems difficult, however,
to comprehend how a soft paternalism regime that simply, for
instance, changes a default rule or presents information in a
manner that utilizes (or combats) framing effects forces anyone to
do anything, especially when considering that any desirable soft
paternalism approach should include an easily exercisable override
mechanism. This point is emphasized by the fact that the
alternatives to changing the default – keeping the old
default – or framing information – leaving information
framed in the manner in which it is already inevitably framed
– are equally paternalistic. Sunstein and Thaler highlight
this point by asking whether, in response to evidence that people
are increasingly likely to select an item the closer it is placed
towards the front of a cafeteria line, would “anyone...object
to putting the fruit and salad before the deserts at an...cafeteria
if the results were to increase the consumption ratio of apples to
Twinkies?”[93]

In regards to the suggestion that an active choice
requirement should take precedence over planners choosing one
default over another, Sunstein and Thaler properly recognize that
active choice is another option that planners would be
choosing and, “the very requirement that employees make a
choice has a strong paternalistic element. Some employees may not
want to have to make a choice (and might make a second-order choice
not to have to do so).”[94]

Another alternative mentioned earlier involved
planners simply tracking the preferences of individuals and then
giving them what they want. While acknowledging that in some
circumstances such a system may be a viable alternative, proponents
of soft paternalism respond by citing evidence that in may areas,
as numerous examples above (such as 401(k) enrollment behavior)
reinforce, people simply lack well-formed preferences: “In
such cases, it is meaningless to ask what most employees would do.
The choices employees will make depend on the way the employer
frames those choices. Employee ‘preferences,’ as such,
do not exist in those circumstances. We think that savings behavior
is a good example of a domain in which preferences are likely to be
ill-defined. Few households have either the knowledge or
inclination to calculate their optimal life-cycle savings
rate...”[95]

In regards to the traditional economists’
solution of choice – providing the public with information
– there are numerous problems with such an approach. To begin
with, any provision of information by the government is already
inherently paternalistic – the way in which the government
presents the information will inevitably affect individual
behaviors, choices and preferences through framing effects. Thus,
at the very least, the soft paternalism approach of attempting to
understand and control framing effects to maximize individual and
societal welfare when engaging in an information campaign should
not be objectionable to the economist camp.

Moreover, it is worth noting the potential negative
implications of “over-informing.” It has been shown
that in the realm of information dissemination through hazard
warnings, over-warning is a real concern. If information related to
every danger or hazard is communicated to a consumer, then warnings
begin to lose their effectiveness and sense of meaning to the
consumer. In addition to this loss of information credibility (if
everything is dangerous, nothing is dangerous) providing too much
information runs the risk of distorting relative product
comparisons[96] . In other words, if both Drano and Listerine are
labeled as “dangerous” it becomes more difficult to
alert consumers to the far more serious hazards involved with the
use of Drano.

Finally, in response to hard-line
paternalists’ view that if planners know, “what’s
best,” choice should be taken out of individuals’
hands, proponents of soft paternalism would argue that the freedom
of choice associated with allowing for policy opt-outs and
overrides actually enhances the ability of planners to win approval
for policies that strive to maximize welfare by assuaging the
concerns of the relatively dominant class of libertarians.
Moreover, not all welfare-oriented policies are created equal,
leading some to suggest that, “the risks of confused or
ill-motivated plans are reduced if people are given the opportunity
to reject the planner’s preferred solutions.”[97] More importantly, opt-outs should help mitigate
any damage caused when, inevitably, some well-intentioned policies
turn out to be mistakes.

Section 2:

A Brief History of the Regulation of Cigarettes
in the United States

Cigarettes are a “source of worldwide
misery”:[98] “Each year in the United States,
approximately 440,000 persons die of a cigarette
smoking-attributable illness, resulting in 5.6 million years of
potential life lost, $75 billion in direct medical costs, and $82
billion in lost productivity...an estimated 8.6 million persons in
the United States have serious illnesses attributed to smoking;
chronic bronchitis and emphysema account for 59% of all
smoking-attributable diseases.”[99]

Highlights in the history of tobacco regulation in
the United States include:

The 1992 Synar Amendment, requiring States to establish and
enforce prohibitions on the sale and distribution of tobacco
products to persons under 18 years of age.[100]

The 1998 Master Settlement Agreement (MSA), prohibiting
numerous marketing practices, especially those likely to entice
youth; six corporate signatories also promised an endless series of
payments to the settling States, currently $8 billion
annually.[101]

The United States has endorsed the World Health Organizations'
2003 Framework Convention on Tobacco Control (FCTC).[102]

The FCTC enumerates well-studied, politically safe measures
such as taxation; limiting youth access; regulating the content,
packaging, advertising, and sales of tobacco products; and
educating the public about risks.[103]

Several states and many municipalities now require smoke-free
workplaces.[104]

Moreover, the 2004 Family Smoking Prevention and
Tobacco Control Act (US Senate bill S2461), “would have given
the US Food and Drug Administration [FDA] limited authority to
regulate cigarettes to ‘protect the public
health.’”[105] Although the measure was subsequently defeated
in the House of Representatives, it is worthwhile to note some of
the points of authority that the bill proposed to extend to the
FDA:

1) Changing the language of the current cigarette
health warnings, substantially enlarging their size and granting
the FDA the authority to require new warnings in the future;

2) Full disclosure of ingredients added to tobacco
products;

3) Authority for the FDA to regulate, or ban, terms
such as “light” and “low tar”;

4) Authority for the FDA to mandate changes in the
design of tobacco products to protect the public health, including
authority to remove harmful ingredients and smoke constituents;

5) Authority for the FDA to do more to prevent
minors from using tobacco products;

6) Authority to establish standards for products
that could potentially reduce the harm caused by smoking and define
the appropriate ways to communicate about these products; and

As many scholars have noted, the defeated
legislation, as well as the regulatory measures noted above, are
relatively weak; the FDA’s authority would be limited and
specifically enumerated under the proposed bill and none of the
previously implemented measure seem to have been particularly
successful in substantially combating smoking related illnesses and
death.

The need for more effective tools in the battle to
realize effective and meaningful regulation of cigarettes is
highlighted by the fact that, “most smokers would like to
stop smoking cigarettes. Indeed, 40% of U.S. smokers have tried to
quit smoking in the past 12 months, and 80% have tried to quite at
some point.”[107] Traditional approaches (such as traditional
economics), however, have thus far offered little insight into the
enigma of smokers who would prefer to quit but continue smoking,
and dying.

The dire need for more effective measures of
government (FDA if future legislation is passed, or otherwise)
regulation of tobacco having been established, this paper will now
turn to recent developments in the field of behavioral law and
economics that have offered new insights into tobacco
products’ grip upon users who want to quit, as well as
innovative soft paternalism proposals aimed towards reversing the
tide against cigarette related morbidity.

Section 3:

Self Control and Time Inconsistency
Problems

We begin our exploration of how soft paternalism
might benefit policymakers battling cigarette addiction by
introducing further human deviations from the standard economics
assumption of rational actors, or homo economicus, that are
particularly applicable to the regulation of cigarettes: self
control and time inconsistency problems.

A growing body of evidence suggests that,
“People are impatient – they like to experience rewards
soon and to delay costs until later. Economists almost always
capture impatience by assuming that people discount streams of
utility over time exponentially. Such preferences are
time-consistent: A person’s relative preference for
well-being at an earlier date over a later date is the same no
matter when she is asked.” This traditional approach
according to proponents of behavioral law and economics
“ignores the human tendency to grab immediate rewards and to
avoid immediate costs in a way that our ‘long-run
selves’ do not appreciate.”[108]

An example of this phenomenon is the oft-cited
study where participants are asked to choose between seven hours of
unpleasant activity on a given date, say, April 1 and eight hours
of the same unpleasant activity two weeks later (April 15). If
asked two months prior to the earlier date, nearly all participants
select the earlier date. Time inconsistency is revealed when
participants are asked again on April 1, and overwhelmingly choose
to delay the unpleasant activity by two weeks, notwithstanding the
extra hour of unpleasant activity that this entails.[109] Academics have termed this behavior,
“present-biased preferences” (“When considering
trade-offs between two future moments, present-biased preferences
give stronger relative weight to the earlier moment as it gets
closer.”[110] )

At this juncture, revisiting the problem of defined
contribution pension plans explored above in the context of the
Choi, et al, study should help to clarify the problems of
self-control and time inconsistency, as well as to introduce an
example of how soft paternalism can be successfully implemented to
mitigate the boundedly rational behavior that is derivative of
self-control and time inconsistency issues.

Recall from above that the Choi, et al, study
revealed that about two-thirds of 401(k) participants perceive
their savings rate to be “too low.” Moreover, recall
that 35 percent of those in the low savers group of respondents and
11 percent of those in the “about right” group reported
future plans to increase contribution rates in the closely
following months. Finally, recall that a follow-up survey revealed
that an overwhelming percentage (86 percent) of those planning a
near term increase to savings rates did not follow through with
their stated intentions during the four months following the
initial survey (see figure 6, above).

Other research has further revealed that,
“employees at firms that offer only defined-contribution
plans contribute little or nothing to the plan.”[111] Furthermore, though automatic enrollment
defaults, as shown above, “have proved to be remarkably
successful in increasing enrollments...[t]he very inertia that
explains why automatic enrollment increases participation rates can
also lower the savings rates of those who do participate...the vast
majority of new enrollees elected the default savings
rate...and...analysis shows that many of these employees would have
elected a higher savings rate if left to their own
devices.”[112]

Richard H. Thaler and Shlomo Bernatzi, are,
however, unsurprised and largely attribute these findings to
problems of self-control and procrastination, “the familiar
tendency to postpone unpleasant tasks”[113] (loss aversion is also implicated as individuals
overly-weight the decrease (loss) in take home pay after a
contribution rate increase). People often procrastinate due to time
inconsistency, “because they (wrongly) think that whatever
they will be doing later will not be as important as what they are
doing now.”[114] Thaler and Bernatzi, therefore characterize low
savings behavior as a mistake, in the sense that the low savers
themselves, “might characterize the action in the same way,
just as someone who is 100 pounds overweight might agree that he or
she weighs too much.”[115]

Thaler and Bernatzi therefore proposed an
innovative soft paternalism program, “to give workers the
option of committing themselves now to increasing their savings
rate later, each time they get a raise,”[116] to deal with the boundedly rational behavior
exhibited in savings behavior as a result of self control and time
inconsistency problems: Save More Tomorrow™ (SMarT). The four
main pillars of the plan are: 1) approaching employees about
increasing their contribution rates a considerable time before
their scheduled pay increase; 2) contributions of participants are
increased as soon as they receive a raise (“This feature
mitigates the perceived loss aversion of a cut in take-home
pay”); 3) contributions continue to increase with each
additional raise until a preset maximum is hit; and 4) participants
are allowed to opt out of the plan at any time.[117]

According to the findings of Thaler and Bernatzi,
the SMarT program was an overwhelming success. Most offered
employees elected to enroll and the vast majority of those who
enrolled never exercised the opt-out. Moreover, the program’s
first implementation (the data from this implementation covers four
annual raises) resulted in a nearly four-fold increase in savings
rates.[118]

Thaler and Bernatizi offer the following
clarification: “one reason why the SMarT plan works so well
is that inertia is so powerful...The SMarT plan takes precisely the
same behavioral tendency that induces people to postpone saving
indefinitely (i.e. procrastination and inertia) and puts it to
use.”[119]

It is worth noting that the SMarT program is even
less paternalistic than the automatic enrollment default change
studied by Choi, et al. Soft paternalists would likely have no
objection to, and would be interested to see the results of, a
variation of the SMarT program that includes an automatic
enrollment so long as an easy opt-out mechanism is also
available.

Section 4:

Translation to the Regulation of Cigarettes

The concepts of self-control and time inconsistency
problems seem to translate remarkably well to the market for
cigarettes.

The traditional economics approach to addictive
activities, such as smoking, is called the rational addict model.
This model, popularized by Becker and Murphy, asserts that
“consumption of addictive bads is governed by the same
decisionmaking process as is consumption for all other goods.
Consumers trade off utility gains from consuming the good against
the costs of doing so, and as rational forward-looking agents they
recognize that those costs include the damage that they are doing
to themselves through consumption, as well as the additional future
damage to which they are driving themselves by consuming more of an
addictive good. In this standard revealed preference framework,
there is no rationale for government regulation of addictive bads
other than interpersonal externalities,” since,
“individuals are pursuing these activities
“rationally.”[120]

There is, however, an increasingly established body
of evidence suggesting that self control and time inconsistency
problems play a significant role in the consumption of addictive
goods such as cigarettes.

To begin, as outlined above, there is significant
empirical evidence suggesting that individuals are time
inconsistent, whereby, “when considering trade-offs between
two future moments, present-biased preferences give stronger
relative weight to the earlier moment as it gets
closer.”[121] In other words, there is often an internal
struggle of our long-run goals and patient desires against our
momentary desires and indulgent selves,[122] and this is more likely the case for short-term
pleasures (like smoking), as the social science evidence suggest
that time inconsistency is most pervasive in the context of short
horizons.[123]

Moreover, econometric tests have established that
it is possible to distinguish between time consistent and time
inconsistent individuals according to impact on well-being
attributable to cigarette taxation. The basis of this model is that
while time consistent smokers should be made worse off by
cigarettes taxes (in line with the rational addict model of Becker
and Murphy), time inconsistent smokers are actually made better
off, as taxes provide a mechanism of self-control which these
smokers’ future selves value.[124]

Relatedly, the frequent use of self-control
mechanisms when smokers attempt to quit further bolsters the case
for accepting time inconsistency as influential in cigarette
addiction, as time-consistent rational actors should have no use
for a self-control device whose purpose is to lower the utility
from cigarette consumption . This is due to the fact that in
order for rational, time-consistent actors to decide to quit, they
must have first decided that the utility gained from smoking is
already too low to justify continued consumption; therefore, self
control devices, such as betting with friends or telling
acquaintances about the decision to quit would serve no
purpose.[125]

Finally, smokers exhibit a pronounced incapacity
for follow through upon “predicted or desired future levels
of smoking”[126] (much like the participants who planned to save
more in the Choi, et al, study). For instance, in the case of high
school senior smokers, while 56 percent say they will quit within
five years, only 31 percent actually do; and of those smoking more
than one pack per day, the smoking rate is surprisingly lower
amongst those who said they would not quit than those who said that
they would.[127] This evidence seems to point towards a
conclusion that many people who wish to quit when viewing the
decision from afar (rationally) are unable to do so.

Cigarette Regulation: Soft Paternalism
Proposals

Given the applicability of self-control, time
inconsistency and other problems of bounded rationality to the
market for cigarettes, what does soft paternalism have to offer in
regards to the regulation of cigarettes? This paper will now
outline a few recent proposals below and then follow up with
critiques of the proposals and a take upon which proposal is
best.

Proposal 1: Taxation

Perhaps the most common proposal for regulating
cigarettes through a regime that attempts to debias, or account for
the bounded rationality of, individuals is through increased excise
taxation.

The traditional economics approach to the taxation
of addictive goods is that government should only step in with
taxes or other regulations when externalities arise from the use of
an addictive good: “Since smoking, like all other consumption
decisions, is governed by rational choice, the fact that smokers
impose enormous costs on themselves [internalities] is
irrelevant...”[128] Therefore, the current average levels of
cigarette taxation (76 cents per pack[129] ) are justified as a mechanism for
internalizing within the smoker the true costs of smoking that
manifest themselves as externalities through increased group
insurance rates and money spent on public medical and other
programs.

This traditional model, of course, fails to take in
consideration self control and time inconsistency problems. The
costs of smokers succumbing to desires of immediate gratification
are borne by our future selves and not properly accounted for
internally due to the time inconsistency phenomenon described above
– an internal externality or internality, if you will.
Therefore, according to the model proposed by Gruber and Koszegi,
which accounts for costs borne by smokers’ future selves, the
proper level for taxation on cigarettes easily exceeds $1 per pack,
far above the current level of 76 cents.[130] Taxes that account for internalities, according
to Gruber and Koszegi, provide, “a commitment device that is
valued by time inconsistent consumers.”[131]

Proposal 2: Restricting Retail Outlets or
Times of Sale

Recall our discussion of “present-biased
preferences” and the “seven versus eight hours of
unpleasant activity” example above (“When considering
trade-offs between two future moments, present-biased preferences
give stronger relative weight to the earlier moment as it gets
closer”).[132] The idea behind restricting the locations or
times where or when cigarettes can be sold is to force consumers to
make decisions ahead of time and thereby help mitigate the effect
of present-biased preferences.

These proposals would work by reducing the
frequency of smokers being near a vendor that will sell them
cigarettes (according to Beshears, et al, there are six cigarette
vendors within one block of the Harvard Square subway
station[133] ). For instance a limited number of vendor
licenses could be auctioned off, or otherwise distributed, or
cigarettes sales could be banned at gas stations, supermarkets or
near any center of public transportation. For a time-based
regulation, cigarette sales could be limited to 2 hours per day,
say 8am-10am.

Such proposals could theoretically work by making
it more inconvenient for a smoker trying to quit to satisfy a
present-biased momentary desire for gratification.[134] If there were only a few cigarette vendors in a
smokers’ city, for instance, the smoker would be forced to
“partially precommit” to a number of cigarettes, versus
being able to walk to any convenience store down the
block.[135] The added cost of satisfying impulses to smoke
would make it easier for a smoker to resist. Furthermore,
time-based restrictions would similarly force smokers to precommit
to a quantity of cigarette consumption in advance (favoring our
future-thinking selves) and even further restrict one’s
ability to satisfy a momentary urge to indulge in a
cigarette.[136]

A variation of time of sale regulations is based
upon building a delay between the moment of purchase and the moment
of consumption. For instance, cigarette sales could be limited to
mail order. This would, again, limit the ability for a smoker faced
with an immediate urge to satisfy a “transitory
desire” to smoke.[137] According to Beshears, et al, a delay-based
system, “would work well for a consumer who was happy to
commit not to smoke next week, but could not resist smoking right
now.”[138]

Proposal 3: Facilitating the Enforcement of
Self-Regulation

The facilitation of self-regulation, where the
consumer decides whether to restrict smoking decisions and to what
extent, offers the benefit of maximizing consumer-autonomy.

Beshears, et al, imagine self-regulation working
through one of a variety of ID card mechanisms. For instance, the
least restrictive ID card regime would require consumers to hold a
cigarette license to buy a pack of cigarettes, which they could
obtain by simply filling out an application and paying a modest
maintenance fee. A built in delay between filing the application
and delivery of the card (say, one month) would help even the
playing field between present-biased (driven by indulgent impulses)
and future thinking selves, as would the ability to tear up or
throw away the card if an individual decides to quit.[139] According to Beshears, et al, an annual
expiration date would also provide smokers wanting to quit with a
“salient quit date.”[140] Importantly, the ID card regime benefits from
a default of not smoking, “since not applying for the
cigarette card is the path of least resistance.”[141]

A cigarette ID card regime could also allow for
individuals to customize their self-regulation. For instance,
consumers could choose from (or not choose any) a host of possible
restrictions ahead of time to preemptively limit the ability
of present-biased impulses to override and impose internality costs
upon their future-thinking selves. For instance, restrictions upon
a license, such as time of day or location restrictions could be
printed on the ID card, or limits on the quantity of cigarette
purchases selected could be imbedded into a magnetic strip (i.e. 5
packs per week).[142]

While consumers would, and should, be able to alter
their preferences, Beshears, et al, envision a system where
adjustments to customized restrictions would be time-delayed (i.e.
three days), “preventing consumers from increasing allowances
on impulse in order to smoke immediately.”[143]

Critiques and Picking a
Favorite

To begin, all of the proposed soft paternalism
approaches to cigarette regulation are subject to the criticism
directed toward paternalism generally. Indeed, all of the
approaches outlined above involve measures “with the explicit
goal of improving welfare of the people affected by
them.”[144] We do not address these concerns again here,
however, as they have been discussed at length above.

There, are however, further criticisms that are
more specific to the use of soft paternalism to combat issues of
self-control and time-inconsistency. Glen Whitman, for instance,
argues that, “internality theory in its current form
unjustifiably ‘takes sides’ when it chooses to favor
some personal interests over others.”[145] By “taking sides,” Whitman is
referring to regulators choosing to favor the future self over the
present self, and offers the clever rhetorical question of whether
it is really the place of the government to favor long-run obsessed
“misers, workaholics, and anorexics,” over short-run
sympathetic, “obese and...profligate.”[146]

Yet, Whitman seems to ignore the growing social
science evidence, discussed above, pointing towards the fact that
boundedly rational individuals do not fully appreciate nor
internalize the costs they are imposing upon themselves, present
and future. Notwithstanding staggering numbers of medical problems
and deaths, these un-internalized costs seem especially large in
the realm of smoking, as demonstrated by the Gruber and Koszegi
study (discussed above). Properly motivated soft paternalism,
moreover, does not attempt to take the choice of smoking or
overeating away from consumers. Rather, it simply attempts to
reduce the impact of bounded rationality on decisions that
consumers will still make for themselves.

There are, however, serious problems with several
of the soft paternalism approaches to regulating cigarettes. To
begin, there are serious questions as to whether an excise tax
actually qualifies as soft paternalism at all. While many, if not
most consumers suffer from self-control and time inconsistency
problems, inevitably, others do not. Those who do not suffer from
time-inconsistency, who want to continue smoking indefinitely,
would still have the choice to purchase cigarettes. However, there
would be no option to avoid the tax. On that dimension, then, there
is no opt-out from the paternalistic regulation and the tax fails
the burden imposed by soft paternalism.

Moreover, this criticism holds true for the
location-based and time-based restrictions (including the delay
approach) as well. While happy smokers can still purchase and
consume cigarettes under either approach, they would be heavily
burdened with no opt-out mechanism and their welfare would suffer
as a result. While these measures may, as an empirical matter,
still benefit society on a net basis, it would be a strain to
consider them true soft paternalism measures.

Taxation suffers from the further flaw that
properly calibrating taxes is far from an easy task. To begin, the
$1 plus excise tax proposed by Gruber and Koszegi takes into
account internalities and add the proper tax attributable to
internalities on top of the tax that is assessed to account for
externalities (i.e., state funded medical expenses or increased
group insurance rates). There is considerable controversy, however,
as to the true extent of externalities attributable to cigarette
smoking. While some economists assert that the proper taxed based
upon externalities is 16 cents, others claim the proper level is 37
cents, and still others claim that externalities are even
higher[147] .

On the flip side, one prominent Harvard economist,
Kip Viscusi, argues that on a net basis, not only do smokers not
cause society a net externality cost, smokers actually save society
money. He argues that if you examine smokers through their
lifetimes and look at the trajectory of medical costs attributable
to smoking and then compare that to the trajectory of healthy
nonsmokers, it becomes apparent that while smokers do impose higher
levels of costs upon society at any given time, they do so for a
shorter period. Thus, according to Viscusi, the net result, when
accounting for societal savings as a result of smokers’
shorter lives (i.e. nursing home care, social security, retirement
pensions) is actually a net gain to society of 27 cents per
pack.[148] While labeling smokers’ early deaths
beneficial may seem unseemly, the point is that the optimal level
of taxation is far from clear when basing it on a calculation of
the costs caused by cigarette consumption.

And the Winner is...

The concerns involved with excise taxes,
location-based regulations and time-based regulations are not the
only reasons why a customizable self-regulation regime, such as the
ID card system Beshears, et al, propose, makes the most sense.

To begin, as stated above, an ID card system offers
autonomy and consumer choice. Even time-inconsistent individuals
have the most information about their own preferences; they just
need some help to enforce the decisions made before present-biased
preferences take their toll on the rational decision making
process.

Moreover, as reflected by the concerns mentioned in
regards to the alternative proposals, an ID card system provides
time-consistent consumers who wish to continue smoking with no
restrictions an easy and complete opt-out, albeit with small costs
(i.e. filling out paper work or slightly increased prices as a
result of the pass-through of modest administrative fees). In line
with soft paternalism principles, those who initially restrict
themselves and would like to adjust their restrictions should be
able to do so under this plan, by filling out a paper or online
form, for instance, albeit with an implementation delay (i.e. 3
days) to maintain protection from impulse driven present-biased
preferences.

Furthermore, in a manner reminiscent of the SMarT
program introduced earlier, the customizable ID card system with
self-selected restrictions, such as on the number of packs consumed
(i.e. X number of packs per week or month), allows consumers to
restrict themselves in a manner that most accurately reflects their
individual long-run preferences; the alternatives, on the other
hand would have to be calibrated according to average
preferences.

Finally, like the automatic 401(k) enrollment
default scheme outlined above, any ID card regime would take
advantage of the default rule effect, as consumers who do not take
the steps necessary to acquire a cigarette license will be unable
to legally purchase cigarettes. This might not only help
time-inconsistent smokers quit (in the ways describe d above) but
may also discourage non-smokers from ever picking up the addictive
habit, as the 401(k) automatic enrollment default rule example
shows us that individuals often prefer the path of least
resistance.

Although, Beshears, et al, identify other concerns
involved with an ID card regime, namely the potential for a black
market, an ironic countercultural appeal (where smoking becomes
more appealing as it is increasingly discouraged) and costs (of
opting out and administrative)[149] , these concerns apply to any of the soft
paternalism alternatives discussed in this section. Moreover, in
regards to costs, administrative costs would likely be far greater
under a tax or location/time restriction regime and opt-out costs,
as mentioned earlier, would be insurmountable under the
alternatives.

Conclusion

While paternalism has largely been used as a
pejorative term in the United States since the country’s
inception, a growing body of evidence from the fields of economics
and psychology is increasingly adding wind to the back of a
movement to begin embracing paternalistic regulations in regards to
smoking and other realms.

Soft paternalism offers a way to satisfy both the
desire to remain skeptical of government and the temptation to take
advantage of well-established evidence that people often stray from
the traditional assumption of rational behavior and decision-making
in fairly predictable ways, by offering policymakers the
possibility of crafting regulations and laws aimed towards
correcting irrational behavior so long as individuals can easily
opt-out if they so choose.

As the example of 401(k) automatic enrollment
shows, we can take advantage of people’s tendency to take the
path of least resistance by crafting default rules (with opt-outs)
that are preset at the welfare maximizing option. Moreover, the
innovate SMarT program outlined ways to engage individuals to
commit to decisions about the future ahead of time, to mitigate the
effect of present-biased preferences. Both these examples displayed
tremendous outcomes and, therefore, stimulate hope that similarly
motivated programs could be equally useful in other areas of
concern, such as cigarette smoking.

A self-regulation regime using customizable
cigarette ID cards offers the best of what soft paternalism has to
offer. The plan is directed towards an activity that is universally
accepted as a “bad” and that imposes great costs upon
both society and the individual smokers. Smoking offers an example
of where behavior and decisions stray from the rational actor
model, as smokers display prominent signs of self-control and
time-inconsistency problems, leading them to make choices that
stray from their own personal assessment of what is in their
best interest. Moreover, an ID card regime takes advantage of the
innovative soft paternalism tools of default rules and individually
selected pre-commitments. Finally, an ID card system includes the
lynchpin of soft-paternalism, libertarian pleasing opt-outs, by
allowing time-consistent smokers who are not smoking due to
self-control problems to opt-out of any regulation, allowing them
to maximize their own rationally derived personal welfare with
minimal inconvenience or added costs.

[18] In the Hermand, et al, study, in the personal
condition, “participants were informed that the term
‘risk’ referred to the risk of being personally
seriously ill (wounded, and even of dying)...In the...country
condition...participants were informed that the term
‘risk’ referred to the risk for all people in the
country of being seriously ill. In the ...world
condition...participants were informed that the term
‘risk’ referred to the risk for all people in the whole
world of being seriously ill, wounded, or dying...Responses were
given on a 11-point scale label from ‘No risk’ to
‘Extremely severe risk...’ the marks on the scale
ranged from 0 to 100.”

[37] Choi, et al, were initially concerned that
individual perceptions of savings behavior would not correlate well
with the participants actual savings. However, upon comparison with
actual administrative records, the authors revealed that people
reporting their savings rate as below the optimal rate indeed saved
at rates lower than those who labeled their savings rate as
“about right.” In the group of self-perceived
overly-low savers average pre-tax contributions were 5.8% of
income. In the group of “about right” savers, that rate
was 9.0% of income.

[38] Choi, James J., Laibson, David, Madrian Brigitte
C., and Andrew Metrick, “Defined Contribution Pensions: Plan
Rules, Participant Decisions, and the Path of Least
Resistance,” in Poterba, James M., 16 Tax Policy and the
Economy 67, (MIT 2002). (Most respondents planning to increase
savings rates stated an intention to do so within one month, while
another 23 percent planned to do so within two months).

[64]Id, Citing, Rachlinski, Jeffrey, “The
Uncertain Psychological Case for Paternalism. In Symposium:
Empirical Legal Realism: A New Social Scientific Assessment of Law
and Human Behavior,” Northwestern University Law
Review, 97:1165-1225 (2003).

[65] Jolls, Christine and Cass Sunstein,
“Debiasing through Law,” John M. Olin Law &
Economics Working Paper No. 225, 2D Series, The Law School of The
University of Chicago, (2005).

[75]Id. (“It bears nothing that an effort
to use availability to counteract optimism bias would improve not
only the decision making of consumers suffering from optimism bias
but also that of consumers suffering from simple information
failures. A conspicuous, prominent account of injury from a product
may help to correct the estimated probability of harm attached to
the product by an optimistically biased consumer. At the same time,
it should improve the behavior of imperfectly informed but not
necessarily biased consumers.”

[127]Id. Citing, U.S. Department of Health and
Human Services, “Preventing Tobacco Use Among Young People: A
Report of the Surgeon General,” National Center for Chronic
Disease Prevention and Health Promotion, Office on Smoking and
Health, (1994).